The 1.1.3 soft upgrade will upload an "image" (not a picture, it's more like file used for jailbreak)in your iPod that is 300MB in file size.
If you have a 8GB iPod touch with no music, movies, etc, installed yet, the normal size you will see is 7.4GB or 7.4GB. The other 600MB or 700MB is used by your iPod files.
Sorry, I couldn't explain it very well.